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The Republicans



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Rediscovering the Great British Republican Tradition


For a Civic and Constitutional Republic



Issue No 61 Friday 02 July 2010




This week 

  • Deficit Terrorists Strike in Britain - Part One

  • Deficit Terrorists Strike in Britain - Part Two


News Stories

Highlighting news stories important to the Civic Republican view, particularly those that are overlooked or little covered in the main media.




  • Deficit Terrorists Strike in Britain - Part One

Ellen Brown (American author of Web of Debt) has produced another penetrating article which has a link below, She writes “Britain's new coalition government [is] imposing on itself the sort of fiscal austerity that the International Monetary Fund (IMF) has long imposed on Third World countries, and has more recently imposed on European countries, including Latvia, Iceland, Ireland and Greece. Where those countries were forced into compliance by their creditors, however, Britain has tightened the screws voluntarily, having succumbed to the argument that it must pay down its debts to maintain the market for its bonds.”


The consensus here in the UK on the problem that the UK economy faces is staggering. The problem is seen as: How are we going to pay back the debts that this country has? The inevitable answer to this question is summarised with one word: austerity. Austerity for whom and to what extent is a slightly different matter but we know there is going to have to be hardship and austerity – lots of it.

The new coalition government is being congratulated from all sides on its “toughness” and “realism” in its determination to get the country out of debt and preserve the currency and please the "markets". The muted reaction by the British people can be contrasted with the demonstrative reaction of the Greeks who are being subject to similar austerity measures. The British call it “stiff upper lip”. On the continent they call it British "phlegm".

Let us not forget why we have such a massive pubic debt. The coalition seldom mentions that a lot of this debt occurred because Brown’s government bailed out the failed banking system. They prefer to concentrate on New Labour’s spending and taxation record. This is because it is more difficult to persuade someone that they will lose their job and maybe home and be bankrupted through the misdeeds of the bailed out financial sector than through the misdeeds of the previous government. The nation is in a fix because of misgovernment to be sure but it was above all because of the compact between the government and the City which allowed an absurd artificial boom to develop.



But given we are where we are, what is to be done? Let is not define the problem as how we are going to pay back government debt. Let is ask rather: how do we extricate ourselves from the crisis we are in? Once you put the matter in these terms there are other solutions. They might cause panic in the City of London but let’s put that to one side for the present. It is the British people and British productive businesses that we should look to. Consider the possible solutions in turn.

1.   Government Defaulting on Its Debt. Let’s start with the big one. Unthinkable? Well it has already been thought by respected financier and analyst, Doug Casey, among others. He recommends that Greece and other indebted countries, including the United States, should default on their debts. What does this mean in practice? It means the government says to all those who hold government debt in the form of bonds and similar that they will receive no more interest payment and they will not be paid the principal back either. He writes “…all of these struggling governments, including the US government, should default on their debts and punish the people foolish enough to lend them money.”

But isn’t it our pension funds who hold these bonds and so a default will leave them in trouble paying our pensions? Some pension funds might suffer directly but on the other hand the austerity measures are likely to lead to a downturn in the stock market which will also affect pension assets. Also you have to balance any potential damage to pension funds against damage to individuals caused by austerity. No one would claim that default would be without pain but then no option is without pain.

And we should not forget that a lot of the bonds were bought with money created by the banks and still owned by them and perhaps we should not lose too much sleep over the banks. But don’t we own the banks? Yes but they are probably already technically bankrupt if the real toxicity of other forms of debt they hold were properly accounted

The other argument against default is that the British government would no longer by able to raise money through new bond issues as it would not be trusted. The response to that is that this method of raising money is a passport to debt enslavement of people and productive businesses and that is where we are now. We should never make that mistake again. If new funds are required by the government, the government should create the money (see below)

All in all, then default is not such a bad option and as Doug Casey says “Remember, defaults won't destroy what capital there is in the world. Technologies, factories, farms, mines, and such will still exist. They will just change hands.”

2.   Government Printing Money for Quantitative Easing. This means that the Bank of England creates money on its account (i.e. conjures it into existence on a computer keyboard) and uses it to buy previously issued government bonds off the banking sector. Thus the banks have more liquid money on their accounts and the theory is that they will then lend it to individuals and businesses who will then spend it into the economy and stimulate it. This has been tried extensively in the UK and it is generally agreed that the effect is disappointing. The problem is that the banks hold on to the money to boost their balance sheets. And in any case who wants to borrow interest bearing money in an economic downturn.

3.   Government Printing Money And Spending It Directly Into The Economy. This has been done in the USA and in Australia but not in Britain. It is often described as “Keynesian”. As a way of stimulating the economy it begins with the same method of creating money on the government’s balance sheet as Quantitative Easing but instead of releasing it to the banks it is spent on projects - usually infrastructure. Another way of distributing the money is to cut taxes to people and to businesses. Alternatively it can be given to people as a gift say in the form of pensions or other benefits. As long as this goes to people who need the money for day to day expenses it is sure to be spent not saved and so the economy will be generally stimulated.

The only other option is that one that has been chosen


4.    Austerity – Cutting Services And Raising Taxes. Apart from the shear hardship and suffering that this will induce there is no certainty that it will do anything to reduce the deficit.  If I have personal debt I might work more to pay it back. But the austerity measures mean the economy working less not more. The economy will contract. That means smaller tax revenues even if the rates are higher. The government counters that by hauling out the old Neoliberal argument that there will a smaller government and a smaller government leads to an expanding private sector. But even if that were true in theory (which it isn’t) there are bigger forces out there that could scupper it in practice.

The idea of printing money either for Quantitative Easing or Spending Into the Economy is objected to by all current economic and political orthodoxy for just one and only one reason. It will cause inflation. The currency will go down the pan and we will all be broke. The argument is that there will be “too much money chasing too few goods” resulting in price rises. In fact, this is true, but only for large slow moving transactions and this means transactions on assets. QE has kept up the prices of property and the stock market but has had no discernible effect on the fast moving economy of consumption. There may be some fairly modest inflation in this area but it can be adequately explained by other factors. No one has ever been able to demonstrate a link between the amount of money in the economy and the index of consumer prices. The reason is simple. It does not exist.

Now consider the relationship between the creation of money by governments and the quantity of money. This might seem simple. You add in £100 billion of new money and so the money supply increases by that amount. In fact it is not as simple as that and Ellen Brown points out

“… the money supply has been shrinking at an alarming rate. In a May 26 [2010] article in The Financial Times titled "US Money Supply Plunges at 1930s Pace as Obama Eyes Fresh Stimulus," Ambrose Evans-Pritchard writes:

‘The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of institutional money market funds fell at a 37pc rate, the sharpest drop ever.’”

So the panic that printing money will automatically increase the money supply is not born out by experience. This just demonstrates how flawed the current orthodox economic model is.

So which of the four methods of dealing with the public debt should be adopted? The answer is surely a combination of 1. Default and 2. Printing Money to Spend into the Economy. If we don’t take the default option then we will have to increase the money supply astronomically to service the debt and, whereas increases at a controlled rate hold no danger, increases at that sort of level must contain unknown consequences.



Meanwhile the coalition is going to plough on with austerity and nothing else. If these measures contained within them the certainty of success then that would be one thing. But make no mistake this like a war we are entering. We have the war on terror, Now it is the war on the deficit.  It is a strategy that in many people’s eyes will lead to victory and after it is all over we can all go back to peacetime and recovery. But wars are seldom like that. They seldom, if ever, result in anything that can be called victory. Wars just create lots of destruction and change the world in unpredictable ways. No war fought since the Second World War has a victory day to mark its end.

At the moment we are still in the period of phoney war against the deficit. The usual indicators like house prices, inflation, the FTSE index and even unemployment may not look too bad at present. But what happens when the coalition see these indicators going haywire – the FTSE down below 4000, unemployment at 4M, house prices on the floor. It is one thing being gung-ho about starting a war, It is quite another thing sustaining it when the casualties start mounting and there is no end in sight.

On the political side the coalition is now intact and cemented by the declared war on the deficit. When that war turns bad the politics will surely turn very nasty indeed as accusations fly amid a gradual recognition that all the blood, sweat and tears was for nothing and that no one in any of the main parties has a clue what to do to get out of the immense hole.

Pictures are recent photos relating to Afghanistan



Recommended Article of the week



  • Deficit Terrorists Strike in Britain - Part Two

American writer Ellen Brown surveys responses to sovereign debt






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